Opportunity Knocks

Wealth For Life Principle No. 5: I will use homeownership as a foundation for building wealth.

Tyre Sperling dreamed of owning his own home as early as his senior year at Florida A&M University. The Los Angeles native graduated in 2005 and moved to the South a year later. “I couldn’t afford a home in L.A.,” Sperling says. “The median price of a one-family home at that time was more than $500,000. The cost of living in Atlanta was dramatically lower.” Sperling’s sister had just moved there and told him the city was a great place for young, black professionals. He now works as a public relations specialist with United Parcel Service.

Sperling inherited $5,000 from a trust fund and saved it toward his down payment. But it wasn’t until he attended financial seminars at his church that he felt ready to start looking. Besides, the timing was right. “I had just put in a 60-day notice on my apartment complex. Once I saw the news and what was happening in the financial and housing markets, I asked myself, ‘Why move into another apartment? Why not buy a home?’ ”

Sperling, all too aware of the unprecedented spike in foreclosures, also recognized that declining home values represented an opportunity for him to buy a house below market. “That’s how the process started,” says the 25-year-old. “It was quick and painless. I closed within 30 days.” Sperling was attractive to lenders because he paid his credit card balances in full each month and academic scholarships enabled him to avoid student loan debt.

Last August, Sperling purchased a two-bedroom town house in Fulton County. The house was appraised at $125,000, but Sperling paid only $90,500 since it was bank-owned. He put down 3% and obtained a 30-year fixed-rate mortgage at 6.875% from the Federal Housing Authority. He also paid 3% in closing costs. “The bank had lowered the price so much that they were unwilling to negotiate further,” he says.

Currently, a plethora of banks have foreclosed properties for sale, says Rob Robertson, Sperling’s mortgage banker and vice president of operations in the Atlanta division of GMFS Lending. While Sperling got a good deal, not every foreclosure is a bargain, Robertson warns, especially if the house requires a lot of upkeep and the resale value is low compared to that of neighboring homes.

“Now is definitely the time to buy,” Robertson says. “Because of the demand over the last four years, builders built spec homes–houses without specific borrowers committed to purchase. But now, with most of the mortgage programs and creative financing options eliminated, the buyers who used those programs–about 20% of the buying market–aren’t buying. As a result, the market is overbuilt and home values have declined in most areas.”

Sperling was committed to a price range, not necessarily to the idea of buying a foreclosed property. He considered new construction but held fast to his budget. “I didn’t want to go past $110,000 even though I was pre-approved for $165,000. I couldn’t afford that amount with my car note and other bills. I wanted to enjoy the home and not have to struggle every month.”

Sperling crunched the numbers using an online mortgage lending calculator, using his $700 monthly rent as the base. “I could go up $100 to $150 more a month for a mortgage.” He also took into account Fulton County’s high property taxes. In the end, Sperling remained true to himself–his mortgage is $810 a month.

Owning a home is only part of Sperling’s wealth-building strategy. He contributes 5% (which his employer matches) of his $45,000 annual salary to his company’s 401(k) plan, and saves at least $200 a month. He also realizes his town house is a starter home. “I plan to live here for three to five years and then keep it as an investment property and rent it out.”

• Know your credit situation. Sperling learned from Robertson that he would need a credit score of 680 or above to qualify for a mortgage at a good rate. However, more stringent lenders look at credit scores in the 700 range. Payment history accounts for 35% of your credit score, so pay your bills on time even if it’s just the minimum. Always keep your credit card balances at 32% or less than your available credit limit.

• Know what you can afford. As of Oct. 1, 2008, the government abolished down payment assistance programs administered through FHA. No longer can home buyers qualify for 100% financing or use alternative documentation on which they could formerly simply state earnings and not need to verify income or assets. Credit requirements have tightened over the last year or so, but for those borrowers who have maintained their credit, there are still several products available.

• Know your price range. What’s your debt-to-income ratio? This is derived by dividing the amount of money you earn by the amount of money you owe. By FHA lending standards, you can’t have more than a 43% debt-to-income ratio, but aim for 36% or even less. Don’t be persuaded by your real estate agent to exceed your limit and buy above your means. Remember, you’ll be the one paying the mortgage.

• Know your options. In general you should lock in a fixed-rate loan. If you’re moving to Atlanta, for example, for a short-term work
  assignment, and you know you’re going to be in a home for three years, a five-year adjustable rate mortgage may be an option. However, part of the housing crisis is due to people getting ARMs, says Robertson. They were accustomed to paying one rate but couldn’t afford it once that rate went up. If you intend to live in a home for more than five years, get a fixed-rate loan–rates are still at historical lows, 5.64% (at press time). Go to www.bankrate.com to view nationwide interest rates.

The 10 Wealth for Life Principles
1    I will live within my means.
2    I will maximize my income potential through education and training.
3    I will effectively manage my budget, credit, debt, and tax obligations.
4    I will save at least 10% of my income.
5    I will use homeownership as a foundation for building wealth.
6    I will devise an investment plan for my retirement needs and children’s education.
7    I will ensure that my entire family adheres to sensible money management principles.
8    I will support the creation and growth of minority-owned businesses.
9    I will guarantee my wealth is passed on to future generations through proper insurance and estate planning.
10    I will strengthen my community through philanthropy.